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None of us can relax in this dog-eat-prof world

British universities have gone through a difficult passage. But after decades of declining funds and poor morale, there is now a glimpse of a better future. With somewhat stronger funding and a prospect of a sounder financial base, we remain very strong competitors in the global marketplace. Nevertheless, if we focus only on our current position we may miss some bigger international trends and may adopt a more sanguine view than is appropriate.

The competitive environment for British universities is likely to intensify considerably in the coming decades. New competitors in Australia and New Zealand have emerged very quickly and begun to eat our lunch. There are new competitors in continental Europe offering English-medium education at a heavily subsidised price. Even though there are pressures in continental Europe to introduce fees, they remain very low in comparison with the UK and the US, and I cannot see them coming up to our levels for some considerable time.

There are other forms of competition emerging, too. Some universities have been ambitious in basing campuses in other countries, countries that are the source of many overseas students in the UK. American and Australian institutions, setting up branch operations in South Africa or parts of Asia, are offering a subtly different proposition from the ones that students in those countries have faced before. Few British universities have yet gone in that direction, and it is hard to situate trans-national offerings within our structures. We have the University of London external programme, for example, but that is very different from a Monash University degree delivered on a South African campus.

Furthermore, we are beginning to see the arrival of private universities, in some cases run by companies with sizeable financial resources. They are not much interested in research, and they can produce focused teaching programmes, perhaps with a faculty that is not research-active but is more single-mindedly devoted to the teaching role, which, for many undergraduates at least, is no bad thing.

The Bologna Process, in creating pressure for other European countries to adopt a model of provision that is more comparable to the one prevailing in English-speaking countries, has helped universities elsewhere to become more effective competitors in the international market. It is hard to advance that as a reason for opposing Bologna, but we would do well to have our eyes open to the implications. We are levelling the playing field, and we used to be on the higher ground.

Last, there is the potential impact of the General Agreement on Trade in Services. For the time being, the Doha Round is stalled, and so are discussions on the impact of Gats on higher education. But there is some chance that new momentum will be found for international trade talks, and we should recognise that there have been proposals to open up the higher education market to providers from elsewhere. It is quite possible that developments in Gats, and indeed on the European Union directive on services and the internal market, will intensify competition. There are some doubts about precisely how far the markets will be opened, but we must recognise that the changing fee regime in the UK potentially makes our undergraduate market an attractive one for private providers, and if a new Gats agreement makes it impossible to exclude them, we will see new forms of competition. It may also be that new EU rules will expose research contracts and research grants to competition from other providers, whether universities or other entities, across Europe. Are we ready for that? I suspect not. We do tend, when we pitch for research funding, to think of the competitive environment as being one that includes only UK publicly funded universities.

These points are, I recognise, somewhat speculative. But there have been enough debates in the World Trade Organisation framework, and in Brussels, for us to begin to think now about the way in which greater openness and greater competition will affect the sector. I suspect that we will, within a decade, need to think about our markets in a very different way. There is no reason why we should not prosper in this changed environment if we are fast on our feet. But we will need a very different form of market intelligence and a more active approach to collaboration and competition.

As it happens, the London School of Economics has a strategy to handle all this. But in this new, tougher, dog-eat-prof competitive environment, I am not about to tell you what it is.

Howard Davies is director of the London School of Economics. This article is adapted from the Harkness Fellowship Lecture he delivered last week.